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TCM Guide: E-invoicing

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Electronic invoicing (e-invoicing) may have gone through peaks and troughs over the past decade or so when it comes to adoption, but Bruno Koch, founder of Billentis, an international e-billing and invoicing specialist based in Switzerland, is optimistic about the technology’s future. As a pioneer in this space, having introduced e-invoicing in Switzerland a decade or so ago, it is perhaps in Koch’s interests to evangelize a technology that has yet to realize its full potential in terms of completely eliminating the millions of paper invoices companies exchange every year. From a purely financial standpoint, however, e-invoicing is a no-brainer. Official estimates suggest that within Europe alone, e-invoicing in the business-to-business (B2B) space could result in annualized cost savings of more than €200 billion. So why aren’t more companies sending and receiving invoices electronically?

Back in 2001, research firm TowerGroup suggested that less than 1% of the 15.3 billion invoices issued annually in the US and the 12.2 billion invoices issued in the EU were generated electronically. At the time analysts remarked that the e-invoicing market was taking off relatively slowly because of the complexity of implementing change in the business-to-business transaction environment.

In a 2009 report on e-invoicing and e-billing in Europe, Koch paints a far more optimistic picture. In 2008 approximately one million European businesses and 23 million consumers exchanged one billion e-invoices. This year, Koch predicts that every day 1,200 businesses and 11,000 consumers will become new e-invoicing users. According to Koch, current e-invoicing volumes in Europe are 1.5 billion and they are increasing at a gross annual rate of 30% to 40%. “The economic crisis has accelerated that trend,” Koch points out. He estimates that e-invoices make up 6% of total invoices in Europe, which is not bad given that most EU member states only implemented the legal framework for e-invoicing in 2004. “E-invoicing has steadily increased since then,” says a bullish Koch.

Adoption of e-invoicing is not uniform across the EU. Estimates suggest that penetration rates vary from 3% to more than 12%. The Nordic countries have the highest penetration rates with the top performers in B2B e-invoicing receiving 65% to 85% of all their invoices as e-invoices, says Juha Häkämies, a vice president at Basware, a global e-invoicing operator. “In the Nordic market for the past five years or so we have had significant growth in e-invoicing,” says Häkämies. “This year many companies started saying that they won’t accept any other form of invoice other than electronic.”

Pundits believe that a number of factors are coalescing to promote more widespread adoption of e-invoicing. One of the key drivers will be public sector support, says Koch, who expects another three or four European governments to make e-invoicing mandatory this year. He is also adamant that companies need to change their roll-out model if they want more of their counterparts to adopt e-invoicing. Instead of trying to convince counterparts to support e-invoicing, which can take a long time, a much better approach, says Koch, is to bring all partners on board by default, but allow companies to opt out if they don’t wish to exchange an invoice electronically. According to Koch, the opt out model results in customer adoption levels of up to 90%.

Hansjörg Nymphius, chairman of the Euro Banking Association (EBA) and director of market infrastructures at Deutsche Bank Global Transaction Banking, says implementing e-invoicing is far more demanding in the B2B space than on the business-to-consumer side. Unlike B2C where the e-invoice is often linked to the payment, in B2B transactions the payment comes out of a separate ERP system. “The focus on the invoice makes sense,” says Nymphius, “but the real benefits in the B2B space are when you optimize the whole order-to-pay processing stream.”

Häkämies says adoption of e-invoicing has also been slower in Italy, Germany and Spain where local legislation requires e-invoices to be digitally signed. In Nordic countries and the UK digital signatures are not required. Koch says the debate now at the EU level is whether e-invoices should be treated equally with a paper invoice; in other words if paper invoices don’t carry signatures, why should e-invoices?

As part of its ambitious Lisbon Agenda, the European Commission (EC) formed an Expert Group on e-invoicing, which aims to encourage the development of EU-wide interoperable electronic invoicing and transmission solutions, independent of any single infrastructure or technology. Koch estimates that there are approximately 350 e-invoicing service providers and an additional 150 software companies providing solutions. While consolidation seems inevitable, he says most providers still believe they could be the Microsoft of the future when it comes to setting the standard for e-invoicing globally. So far, none has accumulated the critical mass to dominate the space.

Häkämies says that e-invoicing service providers need to process approximately five million e-invoices annually to make the business feasible, but smaller players have nowhere near these volumes so they are likely to exit or consolidate the business. The key to gaining critical mass, says Häkämies, is forging interoperability with other e-invoicing networks. Basware has approximately 50 interoperability agreements globally with other networks, which contributes 30% of the 10 million true e-invoices it processes annually (2009).

Koch hopes to use an e-invoicing operators’ forum in September to encourage support for cross-industry e-invoicing standards and interconnectivity as customers are demanding a single point of contact. However, getting vendors to coalesce around a single e-invoicing format will not be easy. “Within the EU, there are multiple e-invoicing formats depending on whether you are sending an invoice from an SAP ERP system or Oracle,” explains Häkämies.

In practice, suppliers send their invoice data to e-invoicing providers such as OB10 in their standard data format. OB10 then enriches, verifies and translates it to the data format of their customer or buyer. So, although many different formats exist, e-invoicing networks like OB10 act as a translation engine, mapping invoices to the different formats supported by customers. However, few e-invoicing operators provide any-to-any format conversion.

Häkämies: Many Nordic

companies are saying they will

only accept electronic invoices

The EC Working Group on e-invoicing is promoting a pan-European e-invoicing standard based on a so-called cross-industry invoice created by the United Nations’ Centre for Trade Facilitation and Electronic Business (UN CEFACT). Koch says the UN CEFACT e-invoicing standard covers more than 90% of all invoices and is open enough for any industry to use. While a global e-invoicing standard is ideal, Nymphius of the EBA says there is unlikely to be one universal standard in the near future as some industries like the automotive industry, for example, have pre-existing standards that they are unlikely to abandon overnight. “What is needed is a standard that allows for conversion without having to change the information in a given field and can still support the e-invoicing requirements of a particular industry segment,” he says.

Häkämies says it will be some years before the EC Working Group’s recommendations are fully implemented in practice. In the meantime he says e-invoicing operators and invoicing software providers need to work together to establish interoperability alliances for the benefit of buyers and suppliers. However, one major stumbling block to pan-European e-invoicing remains: the need to harmonize legal and tax legislation across the EU. “That is the most time consuming,” says Koch, adding that it could take at least three years to change. And while standardizing EU e-invoicing regulations will improve clarity and reduce concerns over tax compliance, an OB10 spokesperson asks, “Will countries such as Germany and Italy really allow less stringent rules than they have today? Will countries such as the UK have to follow the more stringent rules of these countries?” There is clearly debate to be had between the member states before a decision can be made.